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A Quiet Tailwind for Southern California Housing

Financing Rules Expand Affordable Build Capacity

San Diego, CA — Updated Sept. 9, 2025

Southern California could see a gradual uptick in income-restricted rental construction over the next few years, thanks to recent federal tax changes that expand the pool of financing for affordable housing—and fast-track alignment by California agencies. CalMatters

What Changed

  • More 9% credits (permanent increase). States receive a larger ongoing allocation of 9% Low-Income Housing Tax Credits (LIHTC), allowing more projects to pencil into feasibility. novoco.com+1

  • Lower bond threshold for 4% credits (the “50% test” → 25%). Projects can now qualify for 4% credits with a smaller share of tax-exempt bond financing, freeing scarce bond capacity so more developments can move forward. California’s tax credit committee has initiated emergency rulemaking to implement the 25% test in current allocation rounds. California State Treasurer’s Office+1

Why It Matters for SoCal

  • More viability = more starts. The reduced bond requirement could unlock stalled deals across Los Angeles, San Diego, the Inland Empire, and Ventura—especially mid-scale infill and transit-proximate sites common to the region. LAist

  • Pipeline outlook. Independent analyses estimate these changes could finance a significant increase in affordable rentals nationwide over 2026–2035, with California capturing a meaningful share. Actual SoCal delivery will depend on local funding and project readiness. novoco.com+1

Timing to Watch

  • Near-term (this fall through early 2026): California application updates and rounds reflecting the 25% test are underway, potentially moving queued projects to closing. California State Treasurer’s Office

  • Medium-term (2026–2028): Expect more Southern California starts as financing closes and construction cycles turn into deliveries. novoco.com

Important Caveats

Expanded credit capacity doesn’t eliminate other constraints. Outcomes still hinge on:

  • Local gap funding layers that typically accompany LIHTC deals.

  • Construction inputs (labor, materials) and interest-rate conditions.

  • Bond administration details as California allocators manage demand under the new threshold. LAistCalifornia State Treasurer’s Office

The Southern California Map (At a Glance)

  • Los Angeles County: Infill, mixed-income, and transit-oriented projects stand to benefit from added bond/credit flexibility. CalMatters

  • San Diego County: Persistent rent pressure and tight vacancy increase the value of marginal new supply; more mid-scale LIHTC deals may pencil. LAist

  • Inland Empire: Entitlement speed and land availability can amplify the impact of easier bond access. LAist

Quick FAQ

What is LIHTC?
The Low-Income Housing Tax Credit is the nation’s primary tool to finance income-restricted rental housing. States award credits that attract private capital to build and preserve affordable units. CalMatters

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What is the new “25% test”?
To use 4% credits, projects previously needed 50% of the eligible costs financed with certain tax-exempt bonds. The threshold is now 25%, freeing bond capacity and allowing more developments to qualify. California has begun implementing this change in current rounds. California State Treasurer’s Office

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When will Southern California see an impact?
Application changes are already in motion. The bigger wave arrives from 2026 onward as financed projects break ground and deliver. GFOA

Key Takeaways

  • New federal LIHTC provisions expand financing capacity via a permanent 9% allocation increase and a 25% bond test for 4% deals. novoco.comCalifornia State Treasurer’s Office

  • California is implementing rule changes now, which could accelerate approvals for projects already in the queue. California State Treasurer’s Office

  • SoCal impact should build from 2026 onward, with near-term progress tied to application rounds, local funding, and construction conditions. novoco.com

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Sources: CalMatters and LAist reporting on California’s pipeline implications; Novogradac analyses on national unit financing potential; California Tax Credit Allocation Committee (CTCAC) and CDLAC rulemaking materials. CalMattersLAistnovoco.com+1California State Treasurer’s Office+1

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